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The Real Deal
The typical homeowner has $50,000 in equity
Home is where the largest portion of wealth resides for three out of four homeowners, and many use the value of their homes when making important financial decisions, according to a recent survey on the effect of home wealth conducted by the National Association of Realtors.
The study shows the accumulation of value in home equity or unrealized gains has measurable effects on behavior. "Our survey finds that 16 percent of people with unrealized capital gains have changed their spending or saving behavior as a result. By contrast, a study by the Federal Reserve suggests only 3.4 percent of holders in stock equity have changed their spending or saving behavior," said the association's chief economist, Dr. David Lereah.
Financial resources and security are just some of the benefits of a build up in home equity. "Homeowners use their home equity to get cash for emergencies as well as the purchase of big-ticket items," Lereah said. "In addition, the capital gains people realize from the sale of their home are a significant source of down payment funds for most repeat buyers, but are used for other purposes as well."
According to the survey, the typical homeowner has $50,000 in accumulated equity. Households with incomes greater than $75,000 typically have a median of $100,000 in equity, while households earning less than $40,000 have a median of $40,000 in equity. Households with inhabitants age 50 or older have a median equity of $80,000. Since these are national statistics, the amounts can be higher or lower in different geographic locations.
The National Association of Realtors shared its findings with the Federal Reserve Board in mid-October in response to a meeting between the association's leadership and Chairman Alan Greenspan earlier this year. "At the time, Mr. Greenspan theorized that the wealth effect of homeownership was offsetting some of the losses on Wall Street in the overall economy. This survey shows Mr. Greenspan is right," Lereah said.
The association's survey of homeowners also shows greater evidence of behavior changes among higher-income households. Just slightly more than half of homeowners tap their unrealized wealth through the use of home equity loans or a second mortgage, and 22 percent of these homeowners pulled cash out of their home when they refinance their mortgage.
For owners who clearly understand the value of the wealth in their homes as opposed to the value of their stocks, bonds and pension plans, the survey found that three out of four homeowners say their house wealth is greater than their stock wealth.
Nearly two out of five repeat homebuyers chose a more expensive home to further improve their standard of living and increase their potential for building even greater household wealth in the future.
While the stock market and economy continue to be uncertain, homeownership still seems to be one of the best investments to make for future value as well as for financial stability. Since the value of a home often represents untapped wealth, it can become a base for making financial decisions as well as providing security.
Information provided in this column is presented by the Realtor members of the Silicon Valley Association of Realtors at www.siliconvalley-realtors.org. Send questions on any topic to jnewton@jnpr.com on the Internet.
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Saratoga, California Since 1955
